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Employee incentives - 2016 Budget Briefing

The Chancellor has today delivered the 2016 Budget. We have set out below a summary of the announcements that may affect your remuneration strategy.

In addition, and for completeness, we have included details of changes announced in previous Budgets and Autumn Statements where these are still to take effect.

INCOME TAX

► The personal income tax allowance (currently £10,600) will increase to £11,000 from April 2016 and to £11,500 from April 2017. The Chancellor confirmed his intention to achieve an allowance of £12,500 by the end of this Parliament.

► The higher rate income tax threshold (currently £42,385) will increase to £43,000 from April 2016 and to £45,000 from April 2017. The Chancellor has previously announced his intention to increase this to £50,000 by the end of this Parliament.

NATIONAL INSURANCE CONTRIBUTIONS (NICs)

► The employer's NICs employment allowance (currently £2,000) will increase to £3,000 from April 2016. Companies where there is a single employee who is also a director are excluded from the benefit of this allowance.

► From 6 April 2016, the upper earnings limit will increase to £827 per week (employees pay NICs at 2% on earnings above the upper limit), the primary threshold will remain at £155 per week (employees pay NICs at 12% on earnings between this limit and the upper earnings limit).

► From April 2018, class 2 NICs will be abolished. Currently, self-employed people have to pay Class 2 NICs at £2.80 per week if they make a profit of £5,965 or over per year. They also pay Class 4 NICs if their profits are over £8,060 per year. Following the abolition of Class 2 NICs, they will only need to pay one type of National Insurance on their profits, Class 4 NICs. Paying Class 2 NICs currently enables self-employed people to build entitlement to the State Pension and other contributory benefits. After April 2018, Class 4 NICs will also be reformed so self-employed people can continue to build benefit entitlement.

CLOSER ALIGNMENT OF INCOME TAX AND NICS

► The Government will commission the Office of Tax Simplification to review the impact of moving employee NICs to an annual, cumulative and aggregated basis and moving employer NICs to a payroll basis. The terms of reference for the review will be published shortly.

CAPITAL GAINS TAX (CGT)

► From 6 April 2016, the CGT rates will reduce from 28% to 20% for higher rate tax payers and from 18% to 10% for lower rate tax payers. The existing rates of 28% and 18% will however continue to apply to gains made on residential property and on carried interest (the share of profits or gains that is paid to asset managers).

TERMINATION PAYMENTS

► Following the consultation on the taxation of termination payments which took place last summer, the Government appears to have backed away from wholesale reform of the tax treatment of termination payments. Instead, it will provide that from April 2018:

► employers will have to pay NICs on pay-offs (for example, termination payments) above £30,000 where income tax is also due. For people who lose their job, payments up to £30,000 will remain tax-free and they will not need to pay employee's NICs on any of the payment (in both cases provided that they are only taxable under section 401 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003));

► all payments in lieu of notice (regardless of whether they are contractual or not) will be subject to income tax and National Insurance Contributions (NICs) in the same way as other payments of earnings;

► the rules will be tightened to ensure that certain contractual payments cannot be paid as damages instead such payments will be treated as earnings and subject to tax and NICs; and

► the exemption for foreign service will be removed.

EMPLOYEE SHAREHOLDER STATUS

► All employee shareholder status (ESS) arrangements entered into on or after 17 March 2016 will be subject to an individual lifetime limit of £100,000 on gains eligible for the CGT exemption applicable to ESS. The new lifetime limit will not apply to arrangements already in place. Previously, the gains eligible for the CGT exemption were uncapped although there was (and will continue to be) a cap of £50,00 on the value of shares at the date of receipt that can be eligible to be taxed as ESS shares.

DISGUISED REMUNERATION

► Finance Act 2011 inserted the disguised remuneration rules in Part 7A of ITEPA 2003. HMRC believes that section 554Z8 of ITEPA 2003 is currently subject to attempted manipulation by a type of disguised remuneration avoidance scheme which seeks to exploit a perceived weakness in section 554Z8 of ITEPA 2003. Legislation will be introduced in Finance Bill 2016 to add an additional Targeted Anti-Avoidance Rule (TAAR) within that section. The TAAR will put beyond doubt that the avoidance scheme does not work by preventing the relief in section 554Z8 from being available where there is a connection, direct or indirect, with a tax avoidance arrangement. The change will be effective from 16 March 2016.

► The Government will introduce legislation to put beyond doubt that all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven't already been fully taxed or repaid on or before 5 April 2019. This new charge will apply to arrangements put in place before the disguised remuneration legislation came into force (i.e. prior to 2011) where the loan remains outstanding as at 5 April 2019.

EMPLOYEE SHARE SCHEMES

► The technical tax rules that affect how shares which were acquired pursuant to the exercise of an Enterprise Management Incentive (EMI) option are treated if there is a subsequent rights issue created a tax disadvantage. These will be amended so that the date of acquisition of shares on a rights issue will not depend on whether the original shares were or were not acquired by the exercise of an EMI option.

NATIONAL LIVING WAGE

► From April 2016, a new National Living Wage will be introduced (via a premium to the current Minimum Wage) for employees over 25 years of age. It will start at £7.20 per hour and is predicted to rise to £9.00 per hour for the tax year 2020/21.

SALARY SACRIFICE ARRANGEMENTS

► Salary sacrifice arrangements can allow some employees and employers to reduce the income tax and National Insurance that they pay on remuneration. However, the Government notes that they are becoming increasingly popular and the cost to the taxpayer is rising. It is therefore considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes – although the Government has confirmed that it is its intention that pension saving, childcare and health-related benefits such as cycle to work should continue to work in conjunction with salary sacrifice arrangements and will not be effected by this review.

LOANS TO PARTICIPATORS

► The loans to participators rules aim to prevent owners of close companies avoiding income tax and NICs by remunerating themselves through loans or advances that are not repaid, rather than taking dividends or salary. The Chancellor announced today that there will be an increase in the rate of tax payable by close companies under the loans to participators rules so that it continues to mirror the higher rate of dividend tax. The loans to participators tax rate will be increased from 25% to 32.5% with effect for loans, advances and arrangements made on or after 6 April 2016.

PENSIONS

► A number of minor changes are being made to the pensions tax rules to ensure that they operate as intended following the introduction of pensions flexibility in April 2015. These include changes to serious ill-health lump sum payments, payments to dependants and payments to charities.

► As previously announced, from April 2016 the Government will introduce a taper to the Annual Allowance (being the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year - currently £40,000) for those with adjusted annual incomes (including their own and employer’s pension contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s Annual Allowance will be reduced by £1, down to a minimum of £10,000.

► As previously announced, the life-time allowance for pension contributions that benefit from tax relief will be reduced from £1.25 million to £1 million from 6 April 2016.

ABOLITION OF A PERMANENT NON-DOMICILE STATUS

► As previously announced, from April 2017 anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes. In addition, it will no longer be possible for somebody who is born in the UK to parents who are UK domiciled to claim non-domicile status if they leave but then return and take up residency in the UK.

► By way of background, individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains. Non-domiciled individuals are able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought (“remitted”) to the UK. To access the remittance basis, longer term UK resident non-doms currently need to pay an annual remittance basis charge.

► The purposed changes will mean that the worldwide income and gains of a number of individuals who are currently non-domiciled in the UK will be brought within the UK tax net as these individuals lose their non-domiciled status.

EMPLOYEE BENEFITS AND EXPENSES

► As previously announced, from April 2016 the £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed and replaced with new exemptions for carers and ministers of religion. In addition, certain reimbursed expenses will be exempt from income tax provided that they are not used in conjunction with salary sacrifice.

► The Government will introduce a package of measures to further simplify the tax administration of employee benefits and expenses by:

► extending the voluntary payrolling framework to allow employers to account for tax on non-cash vouchers and credit tokens in real time from April 2017;

► consulting on proposals to simplify the process for applying for and agreeing PAYE Settlement Agreements;

► consulting on proposals to align the dates by which an employee has to make a payment to their employer in return for a benefit-in-kind they receive to ‘make good’; and

► legislating to ensure that if there is a specific statutory provision for calculating the tax charge on a benefit-in-kind this must be used.

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